The objective of key personKey Person Insurance insurance is to compensate a business for loss of profits on the death, critical illness, or disability as a result of sickness or accident of an employee. As a business owner you will have considered disaster recovery and contingency planning; but have you thought about how the loss of a particular person would impact on the profitability of the company?
 
The financial impact may include: -

• Loss of new business secured by the key person

• Loss of access to loan finance dependent on the key person

• Necessity to suspend or stop production of certain products on the loss of the key person

• The cost of recruiting and / or training a replacement

There are a number of questions that may be asked in order to identify a key person:

• What would be the financial impact to the business of recruiting and / or training a replacement for the person?

• Does the person have a number of contacts that secure significant amounts of business or help ensure the smooth running of the business?

• Does the person come up with ideas important to the company (research & development)?

• Would the loss of the person affect the financing of the business?

• Does the person bring money into the business?

• Does the person save the business money?

• How would the loss of the person affect business profits until he / she is effectively replaced?

This is likely to include directors, senior managers, research and development specialists and sales staff.

The solution.
Key person insurance is designed to protect your business against loss of profits. As with any insurance it is important that the proceeds are in the right hands at the right time. It is the business that will suffer loss and needs to be insured against it.

The usual way to set up cover is to have the company take out the policy (as plan owner) on the life of the key person. It is possible to arrange life insurance, income protection and critical illness policies in this way. 

What about key employees of partnerships?

In England & Wales partnerships are not a separate legal identity from the individual partners. This means that it is not possible for the partnership to own a policy.

A solution to this is to have one or more partners take out an insurance policy and hold it on trust for all the partners in the firm. If the key person is a partner they can take out the policy on their own life and place it in trust for the other partners.

A limited liability partnership (LLP) is able to contract in the business name and so could effect key person cover.